Taiwan, China face off: Has Asian Development Bank room for both?

Tigerlike Taiwan and elephantine China have squared off again in a war of wills, this time in their own backyard and before all their neighbors. The forum is the Manila-based Asian Development Bank (ADB), a mini-World Bank for a region that holds half of humanity. The People's Republic of China, which has not been a member of the bank, informally applied this year - on the condition that Taiwan be expelled.

If China succeeds, the diplomatic isolation of Taiwan will take a great leap forward, Western diplomats say. Eventually, a few more such blows could weaken Taiwan's ability ever to negotiate - or fight - an attempt by the mainland to reunify with its breakaway province, they add.

The United States, having slowly eroded its relationship with Taiwan since 1972, faces a straw-on-the-camel's-back test, since it commands the loudest voice in the ADB.

Up to now, China has succeeded in ousting Taiwan from most other international bodies, including the World Bank. With Ronald Reagan in the White House, however, and China not about to let this issue cause it to lose face (as it did in the asylum case of tennis star Hu Na), the situation is as shaky as a rickety rickshaw with a 300-pound passenger.

''It's now at the gong-banging stage,'' says a Western diplomat in Taipei. ''Any compromise must come much later.''

In all its 17 years, the ADB has been too small ever to make a loan to the region's two giants, China and India; it left them to the World Bank. But flush with fresh funds from Western donors this year ($15.8 billion in capital until 1987), the bank has both poverty-stricken nations - with 1.7 billion people between them - knocking loudly on its door.

At last month's ADB meeting, the US said it would support China's entry into the bank - but not the expulsion of Taiwan. Three years ago, the US Congress voted to have the US seriously reconsider its ADB membership if Taiwan was cast out. A resolution making its way through Capitol Hill calls for definite US withdrawal in such a case.

China could be putting itself in a bind. If the ADB accepts China without expelling Taiwan, Peking would be forced to withdraw its application.

The issue is not as simple as in the case of Taiwan's membership in the United Nations or World Bank. There, it had joined in the pretense that it represented the mainland. But in joining the ADB in 1966, it qualified for loans based on Taiwan's population and resources. And in some preliminary documents, the word ''Taiwan'' was used when referring to the Republic of China, according to ADB officials.

But the ADB charter requires members to belong to the UN's special Asian office in Bangkok. Taiwan has lost that membership, providing a possible loophole for its ouster from the ADB. The ADB charter carries no official provision for expelling a member unless it defaults on a loan. Taiwan has repaid its loans dutifully.

''You can interpret its membership either way; it is really a political, not an institutional, decision,'' says a top bank official. ''No one wants to face China down,'' he says. ''They want to lay the slate clean by getting Taiwan out. But the bank wants to avoid a vote - most issues have not needed a vote here. They were settled with Asian-style consensus. The forces have to clarify. The issue is not totally ripe yet.''

Adds Masao Fujioka, ADB president: ''There cannot be two Chinas. Taiwan would have to leave if China comes in.''

Critical to the final decision will be the position taken by Japan, which ranks second to the US in the bank. Concerned over its new commercial links with the mainland, Tokyo may be the one to pull the plug on Taiwan. But the issue will likely not come to a head until it is clear whether President Reagan, a Taiwan booster, will be reelected in 1984.

What will come up sooner is India's request for $2 billion in loans over five years. Ironically, India made the request when its 40 percent share of World Bank loans began to be eroded by China's entry to that bank. Now China has followed India to the ADB window.

The US opposes India's request on grounds that it will break the bank. ADB's traditional borrowers should get first crack, the US says.

''The resources of the bank are limited,'' says US Treasury Secretary Donald Regan. ''I am suggesting that we not try too much in the way of new things at this particular point until such time as the world's recovery is well under way and innovations seem appropriate.''

A top ADB official agrees with the US stand: ''There's not much we could do for India. Our borrowing markets would look askance at loans to India. At present, they overlook loans to such shaky countries as the Philippines.''

One solution for India is a move by France, the Scandanavian countries, and a few other donors to set up a special fund beyond the agreed-on replenishment this year. Such a kitty would not only make a loan to India possible, but dilute the US voting share in the bank.

''The situation looks better for us,'' says Indian Finance Minister Pranab Mukherjee.

Despite the China and India issue hanging like a thunderhead over the normally low-profile bank, the ADB is making some refreshing changes. It has plans for about $10 million in equity investments with private entrepreneurs (a US idea) and hopes to promote itself as a regional think tank. Mr. Fujioka, the president, promises to use the bank's financial clout to engage governments in a ''policy dialogue.''

Also under US pressure, the bank will become less conservative in defending its creditworthiness in borrowings on US, European, and Japanese markets. With $ 15.8 billion in capital, it is no longer seen as a little bank out in the Pacific.

''We will do this discreetly and carefully - with no publicity,'' Mr. Fujioka says.

American support remains the bank's major domino. Last year's battle over the 1983-87 capital replenishment gave the US a partial victory. The bank and many European nations wanted a 125 percent increase in the bank's capital with 10 percent actually paid in. The US sought only a 75 percent increase with nothing paid in. The result was a 105 percent increase with 5 percent paid in.

Some US officials are now suggesting the bank will be ready in the 1990s to go it alone. Developing nations will start to pay back loans, allowing the money to be recycled. The 45-member ADB has already ''graduated'' Taiwan, Hong Kong, and Singapore from receiving more loans, and Malaysia and South Korea are getting minimal funding. Nepal, Burma, and Bangladesh will need loans for years to come, however.

But if the US and other donors can gracefully withdraw their support in the next decade, it just might deflate the China-Taiwan issue.